Pitfalls???

1_pointer · Nov 9, 2012

As many probably know from the few comments I've made on finances/insurance, I am pretty ignorant on the subjects. That said, I am considering a couple of different options for my benefits/budget and am curious as to what the pitfalls may be.

#1: Flexible Spending Account for dependent care
I spend a butt load of money on day care for my two kids. The way I understand this FSA option is that I could use some of my money, tax-free, on that cost on an annual basis. I don't really see a downside to this as I am spending the money anyway. Are there anything 'pitfalls' I should be aware of before enrolling? What, if any, are the income tax implications from this type of FSA?

#2: Roth vs. Traditional retirement investement
I now have the option of putting, in whole or part, of my retirement funds into a Roth type account. It's my understanding that the investments will be the same as select for the traditional account, except that I will pay taxes on the contribution now and not later. Are the earnings for a Roth account taxed upon withdrawal? Any other issues I need to be aware of?

Thanks in advance.

Wyodeerhunter · Nov 9, 2012

Answer to #1: Consider having the old lady stay home with the kids. This will save the costly day care bill AND open up a job for someone else to go back to work. Not only will you come home to a home cooked meal every day but you will be helping the economy by opening up one more job! It just makes sense.

Oh and then there's something regarding its best for the children etc. But who cares about that?!?! Home cooked meals ready when you walk through the door!!!!!

putm2sleep · Nov 9, 2012

1 pointer
My 2 cents = You should and need to participate in the FSA program! No pitfalls. Just be sure to keep good records like you do for your accountant. No downside.
I assume you have an accountant as you consider these 2 scenarios. If you are spending money on daycare and are thinking Roth vs Traditional you have money, most do not, get a pro to take care of you in this regard.
2 - Place part into a Roth! Yes. Take the other part and invest elsewhere i.e. diversify a little. a - Start a 529 for your children. 529 plans offer unsurpassed income tax breaks. This answers your questions regarding taxes. Gonna have to spend money to save money, that is just the way it is~
b - would look at a mutual fund.

Good luck!

Nemont · Nov 9, 2012

Downside to the FSA is that it is use it or lose it. Meaning that you make an annual election for child care, if for some reason things change and you don't spend everything in the FSA then those funds revert to the employer.

Just make sure you spend everything, then it doesn't matter.

Fund your retirement first before you worry about your kid's college money. I have a Roth and another retirement plan. Given that the distributions on a Roth are income tax free that would allow you to do alot more tax planning in retirement vs. traditional IRA's. For instance you can decide to take some tax free income from the Roth and some taxed income from your other traditional retirement plan in a given year to reduce your tax bill. Just my opinion.

Nemont

RUT JUNKEY · Nov 9, 2012

Wyodeerhunter said:
Answer to #1: Consider having the old lady stay home with the kids. This will save the costly day care bill AND open up a job for someone else to go back to work. Not only will you come home to a home cooked meal every day but you will be helping the economy by opening up one more job! It just makes sense.

Oh and then there's something regarding its best for the children etc. But who cares about that?!?! Home cooked meals ready when you walk through the door!!!!!

1_pointer, if this works let me know!!!

MattK · Nov 9, 2012

1-pointer- Another thing to watch out for with a FSA-dependent care is the money can only be taken out as it is put into the account as opposed to the FSA-medical expense (which you take your entire alotment out as it is needed).

An example is this...we had Logan in preschool (which is allowable expense for FSA dependant care) for the first 5 months of the year/ $200 per month. I alotted the entire amount (let's say 1000 dollars) for the year but it is taken out of my paycheck in equal amounts for the 24 pay periods of the year. As of December 31st, I will receive the last payment of 41.66 (1000/24). With the medical FSA- I would have received the 1000 up front at time of service...

As Nemont said, it is also important to know that it will be use-it or lose-it so I would side on conservative when dealing with the cost (unless you have a contract for x amount per year/ per child).

1_pointer · Nov 9, 2012

Wyodeerhunter said:
Answer to #1: Consider having the old lady stay home with the kids. This will save the costly day care bill AND open up a job for someone else to go back to work. Not only will you come home to a home cooked meal every day but you will be helping the economy by opening up one more job! It just makes sense.

Oh and then there's something regarding its best for the children etc. But who cares about that?!?! Home cooked meals ready when you walk through the door!!!!!

Ha! I should probably try to stay away from the dinner table! As for the rest, I am no where near that philanthropic.

1_pointer · Nov 9, 2012

Thanks for the info fellas! I understand the "use or lose" portion of the FSA, but considering my 2011 day care costs could have sent me on a Dall Sheep hunt, I think we'll be able to spend it. Didn't know if there was anything else I was missing. Sounds like I'll sign up.

Fund your retirement first before you worry about your kid's college money.

Please expound, if you will. I'm all ears.

Right now I do put a portion into my IRA, but now where near the maximum allowed. Would you recommend I hit that ceiling before putting money into a 529? We are (were?) thinking of starting those after the 1st of the year.

Nemont · Nov 9, 2012

1 Pointer,

Max out your retirement and then put money in college plans. Here is why: Your kids can borrow if they have to for college, the main thing with retirement is the time value of money, yes you have to manage it and the stock market can and most likely will take a dump but you can recover from that if you have a good broker or accountant or money manager. None of them can make more time for you to invest in your retirement.

If you can afford to max your retirement plan and fund college that is fine but taking care of yourself first is a better gift for your kids than paying for their school. There are scholarships, the military, (if you are lucky grandma and grandpa) and loans to pay for college.

http://www.forbes.com/2010/03/16/co...rsonal-finance-save-for-retirement-first.html

Nemont

1_pointer · Nov 9, 2012

Gotcha! Thanks for the info and link. You're the first that's ever advocated that to me and it does make sense.

diem24 · Nov 9, 2012

I would advise you do the above. All good, sound advice. As pessimistic as most are on the economy and the future, I still think there isn't a better place to park your long term money than the stock market. Its treated most savvy investors very well over the last 3.5 years.

sagebrush · Dec 13, 2012

Nemont is exactly spot on. And a Roth IRA is the way to go as long as you are planning on a long and comfortable retirement. It doesn't take a math wizard to understand the difference between a small tax saving today versus tax free income on the same dollars, plus the increase in value over time, over the entire duration of your retirement.

As an example, let's say you have a taxable income of $100K while you are working and you save $10K per year in a traditional IRA and you get a tax rate reduction of 3%. You save $2,700 in taxes each year. That $10K invested each year for 30 years at an average rate of return of 8% per year will be worth about $1.25 milllion when you retire. If you take that money over a 30 year retirement period and have a tax rate of 15%, you will pay $6,250 in taxes each year. So you're saving $96,000 in taxes during your retirement years by paying the tax when you earn the money. More importantly, you have the soft benefit of a lifestyle based on $41K annual income versus $35K annual income in your 30 years of retirement.

kansasdad · Dec 13, 2012

sagebrush said:
Nemont is exactly spot on. And a Roth IRA is the way to go as long as you are planning on a long and comfortable retirement. It doesn't take a math wizard to understand the difference between a small tax saving today versus tax free income on the same dollars, plus the increase in value over time, over the entire duration of your retirement.

Unless the WEASELS in Washington D.C. change the laws.....and don't think that sometime somewhere they aren't discussing how to get that money double or triple taxed again.

passinthru · Dec 14, 2012

Our trusted elected officials wouldn't do that.

Roth seems to have the best tax benefits, more than likely you'll be in a higher tax bracket at retirement. So having already paid the tax initially, and allowing compound interest to work its magic, you should be quite a bit better off.

The way it sits now anyway, until somebody in Washington reads Kansasdad's post.

Z Barebow · Dec 14, 2012

Roth vs Traditional IRA.

Depends upon what think the future tax rates will be.

Roth- If you think the tax rates are lower now than when you need the money.

Traditional- If you think the tax rates will be lower when you retire.

With $16T and counting in US debt, I am hedging Roth. (Then again, this does not prohibit a govt moron or 536 morons to change the "rules")

Pitfalls???

1_pointer

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Wyodeerhunter

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putm2sleep

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Nemont

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RUT JUNKEY

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MattK

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1_pointer

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1_pointer

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Nemont

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1_pointer

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diem24

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sagebrush

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kansasdad

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passinthru

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Z Barebow

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